Microfinance institutions (MFI), once euphoric about turning into small finance banks, have now realized that it didn’t guarantee smoother business. Instead, things seem to have gotten worse for them.
Eight out of the 10 who got a licence have begun operations now, the latest being AU Small Finance Bank in September this year. Three are listed and what better example than these to show how brutal the change has been.
Equitas Holdings, which changed itself to a small finance bank in 2016 (the first to become one), has seen its profits come down to just a shadow of what it used to make as an MFI. For the September quarter this fiscal, Equitas reported a net profit of Rs10.9 crore, a sliver of the Rs61.17 crore it had made in June 2016 as an MFI. Its micro credit disbursements dropped by 27%.
The story of the other two listed entities is no different.
Ujjivan Financial Services that holds Ujjivan Small Finance Bank reported a loss of Rs11.95 crore for the September quarter this fiscal, a far cry from the profit of Rs73.01 crore it had made a year ago as a complete MFI. Ujjivan had morphed into a bank in February this year. AU Small Finance Bank’s net profit was 21% lower than what it made as an MFI two quarters ago.
What went wrong?
The upfront cost of expansion, adhering to banking regulations including provisioning of bad loans were high but the players had anticipated this. But what they didn’t expect was the blow of demonetisation to their operations.
In all respects, demonetisation was as lethal as Andhra Pradesh state’s clamp down in 2009. One year since the purge of cash, MFIs and even those that have turned into small finance banks are still reeling under the blow. One of the main bruises was the surge in bad loans. Gross bad loans have swelled to about Rs900 crore for the three listed banks, forcing them to make cumulative provisions of Rs156.21 crore in the last three quarters following demonetisation.
The benefits have been slower to come.
Cost of borrowing for the three small finance banks has indeed come down. But it has hardly contributed to income and profit growth simply because loan offtake was unimpressive. This was blow number two from demonetisation. Given this background, the stocks of these small finance banks look like they need a reality check. Ujjivan’s stock has gained 20% in the last four months and that of AU Small Finance Bank has gained 15%. Equitas is the only stock that has fallen 9%.
At these levels, the stocks trade at rich multiples of their estimated book value for fiscal 2018 simply because they are the new kids on the block in the sector. Juxtapose the potential build-up of deposits and the cost benefits and valuations do look less exuberant. Nevertheless, investors may do well to revaluate their affection for these lenders.